Are You Smarter Than A Fifth Grader?

After speaking with hundreds of CEOs, I realized that burn rate isn’t as Startup101 as I had thought. There are still a lot of things that founders understand incorrectly when it comes to being a #BurnRateZombie. But before we get into it…

Let’s take a pop quiz!

Once upon a time, there was a CEO running a very promising startup. The company was all set to join the ultra-exclusive Unicorn club. It was valued at $900M, and this is how their cash inflows and outflows looked:

(FYI, Singapore fifth-graders’ are expected to take one minute to answer that.)

Thinking $62M? Well, your math is as good as the fifth graders, but you should know better.

Jason realized after all this burn that he doesn’t have a business model. His company had become a #BurnRateZombie, so he sold all inventory, cut the staff, and finally offloaded the company for a special clearance price of $15M. Jason hems for a living now.

Burn Rate is very complicated. See if you understand this.

Burn rate = Money that comes in — Money that goes out

No, don’t mock. It’s tougher than it looks. In fact, I’ve had this talk with so many founders that I created this burn rate calculator to better illustrate my examples.

Jason wasn’t paying attention to the red flags. But here is what you should be doing:

Sit regularly with your accountant and deep-dive into your numbers (I hope you have an accountant!). Beyond the bean counting (what’s coming in and what’s going out), you should have an overall sense of your financials. One thing about numbers — they don’t lie. Know your top five buckets of expenses and analyze them for patterns. Look out for unexplained numbers and unusual variations in expense lines. Grill your accountant on and make sure she/he knows the stuff. If you do not have an accountant, it’s time you get in touch with companies that provide accounting services.

Ruthlessly track KPIs. Track your Key Performance Indicators and tweak your strategy based on what they are telling you. Do not forget that B2B and B2C businesses track different KPIs. For example, as a SaaS company, do you track your company’s magic number? A lot of disciplined operating KPI tracking goes into this number. But once you have the systems in place, the resulting insight for your business is priceless.

Keep your eyes and ears open. Keep an eye out on the market indicators for funding. For example, if the market is down, raising funds might take longer than what you’d earlier accounted for. If you are not prepared for it, that could be fatal. Don’t die mid-keystroke. Die trying. But above all, avoid dying at all.

“If you can just avoid dying, you get rich. That sounds like a joke, but it’s actually a pretty good description of what happens in a typical startup.” — Paul Graham, Y Combinator

4. Know your burn, track your burn, control your burn. Question the expenses you’re committed to. Just because you have okayed something in the past, doesn’t mean you don’t track it’s ROI. The money you spend on networking events is a classic example of doubtful ROI. Constantly trim the fat.

Survival stories are boring. Who wants to hear about the company that didn’t die? Only our client founders, their investors, and us.

Avoid being a #BurnRateZombie by tracking your burn rate. Make your story boring again.